The Balance of the Federation

The Canadian Federation is an institutional arrangement whereby the constituent units are able to both cooperate and compete with jurisdictions that are both separate and coordinate. The debate over the respective roles of the federal and provincial governments has taken various forms over time with views that emphasize the centrality of the federal government along with others that emphasize the federation as a compact amongst equals with the federal government as more of a coordinator.  I suppose this could also be termed executive versus classical federalism as Tom Flanagan described it in a recent Globe and Mail piece. Given that political discourse and decision making out of Ottawa has recently been taking a more decentralized tone when it comes to federal-provincial matters, it might be instructive to take a look at the numbers to see what the balance is between the respective tiers of the Canadian federation.

I’ve gone to the Federal Fiscal Reference Tables to collect data for a basic set of centralization (or decentralization) measures for the period 1966 to 2009.  The first figure takes the ratio of a tier’s own-source revenue (that is, without intergovernmental transfers) to the total of federal, provincial-territorial and local own-source revenue.  The second figure, takes the ratio of a tier’s spending (net of transfers made to the lower tier) to the total of federal, provincial and local spending (with the spending of each tier net of intergovernmental transfers to the next tier).  The point of this is to take a look at the relative resource and expenditure shares across the tiers of the federation.  The results depict what most of us probably already know but which can now be visually demonstrated.  Canada has become more decentralized at the federal-provincial level but the results also suggest it has become more centralized at the provincial local level.

 

In 1966, the federal government accounted for 43 percent of spending, the provincial-territorial level 32 percent and local governments 25 percent.   By 2009, the federal share was down to 31 percent and the local share down to 20 percent while the provincial-territorial share was up to 49 percent.  Indeed, given that under the constitution municipalities are “creatures” of the provinces, there are really only two levels of government.  The Canadian Federation has decentralized to the point where more than two-thirds of spending is now at the provincial-local level.   Own-source revenues have not decentralized as dramatically.  In 1966, the federal government accounted for about 50 percent of own-source revenues, the provincial-territorial sector 34 percent and the local sector 16 percent.  By 2009, the shift was down to 40 percent for the federal level, up to about 46 percent for the provincial-territorial level and down to approximately 13 percent for local governments (numbers have been rounded).

A more decentralized Canadian federation is not a future possibility - it is already here.  Whether this is a return to “classical” federalism is subject to debate.  If one goes back to the immediate post-Confederation period, spending and revenues were also concentrated at the federal level and they became more concentrated in the twentieth century as result of the world war years.  While the federal government practiced “executive federalism” in the second half of the twentieth century, Canada was nonetheless decentralizing as expenditures in provincial areas of jurisdiction –health, education and social welfare – grew.

The question is whether or not this is exactly the decentralization we want.  Even if we accept that the provinces should be a more dominant fiscal tier given their responsibilities for health, education and social welfare, do we now want to simply transfer more tax points to the provinces and eliminate federal-provincial grants all together so that revenue shares better reflect expenditure shares?  What about the cities?  Cities are increasingly where most Canadians live and their governments and services are the closest to the taxpayer and yet the balance has shifted away from them also.  Our focus has been so dominated by Ottawa’s relationship with the provinces that we have ignored the local sector’s relationship with their respective provinces.  While Ottawa and the provinces have engaged in a process of give and take over 140 years given a framework and powers set forth in the constitution, municipalities have only what the provinces let them have.  Based on these figures, it has been mainly take and little give over the last few decades.

(This post was written by Livio Di Matteo)

Comments

[Jim Sentance]

The problem with decentralizing revenue to the provinces is that the revenue bases of the provinces are so wildly unequal that that creates a whole new set of problems. In part that's a reflection of differences in the level of economic activity but increasingly its a function of resource revenues, which no amount of development or making their economies better is going to change. CHT and CST transfers moderate that a bit, and equalization is supposed to do a bit more. But even the bit of decentralization of revenues we've seen over the last while I think has strained that. The more provincial revenues are determined by their own sources the greater the inequities and the larger the transfers needed to equalize them - and the greater the outrage by the better off provinces who feel milked to fund it. At the moment we have a federal government that is listening to those complaints - with results like the move to equal per capita cash transfers and capping equalization. Reform of EI is probably next.

The problem is that skewing the table fiscally like that is going to open up whole new cans of worms.

[Bob Smith]

Jim,

You've forgotten the oldest means of equalizing inter-regional inequality, namely the constitutionally protected right to move between provinces. The resource wealth of Alberta or Newfoundland is available to anyone who wants to enjoy it - they just have to move there (I'm reminded of the scheme that some Ontario municipalities were promoting in the 1990's, where they would offer free bus tickets to Alberta to welfare recipients. Cynical, but actually a sensible policy if helps people overcome the cost barriers to finding new jobs).

Also, even with per-capita funding, there's still an implicit element of equalization because it's funded out of general revenue which isn't raised on an equal per capital basis - i.e., Albertans pay more in taxes, per capita, than, say Ontarians. For the life of me, I could never figure out why (other than political cowardice and opportunism) the premiers of wealthy provinces have insisted on higher per capita transfers from the feds, since every extra $1 from the feds costs their taxpayers an extra $1.30-$1.40 (mind you, it means that the premiers don't have to bear the political cost of raising those taxes themselves).

[Determinant]

Some provinces have strongly centralized local administration. New Brunswick abolished County government in 1966. Ontario downloaded social welfare costs onto municipalities in the infamous "Who-Does-What" review and is now taking them back. Social services, particularly welfare belong with the government that levies income tax which would be the province. Education in all provinces has been centralized ever more through the decades. Ontario has gutted the role of School Boards and New Brunswick abolished them all together.

As I was told in a job interview with a New Brunswick company, New Brunswick is the same size as Scarborough. Interestingly when I called Service New Brunswick to get a replacement birth certificate the phone was answered by a real person. A most pleasant experience.

Anyway, the recent biography of John A. Macdonald has a great illustration of what exactly federalism means. At the Quebec Conference when what became Sections 91 and 92, the division of powers sections, the two sides drew up lists of what they wanted, exchanged them, they all nodded in agreement and went on. There was very, very little discussion. Thus we have the odd fact that the Federal government is responsible for the definition of marriage and regulates Divorce but we can't create a single securities regulator.

Both Canada and the United States both suffer from the fact that our constitutions are old, dating from 1789 and 1867. Nobody at that time on any point of the political spectrum thought of the welfare state as a possibility. The US has worked around this by interpreting the Interstate Commerce Clause and General Welfare clauses within an inch of their lives; Canada has used the federal spending power.

Both really needed overhauls in the 1930's to accommodate the new vision of government and let the federal government run national social welfare programs but for various reasons that didn't happen. Canada tried with the Rowell-Sirois Commission but that was mostly a dead end with the exception of EI.

[Jim Sentance]

Bob- I haven't forgotten, I'm just not convinced it's as efficient as you suggest. Movement to participate in a booming economy is one thing, and already happens to a considerable extent (though very selectively, moderating any tendency to be equalizing). Movement to take advantage of fiscal differences (taxes, services), which is what this is leading to, is quite another. I think Robin Boadway did some work looking at that more thoroughly and arguing in favour of equalization on that basis.

And I don't see how it's sensible to move a bunch of undereducated, under-skilled welfare or EI recipients to Alberta. They'll be as marginal there as here, and at least here they know their way around and have friends and family.

And I don't necessarily agree with your equal cash transfer argument either. Are the feds putting more into the pot or collecting more revenue to finance this? I don't think so. Moving to equal per capita transfers is being effected by taking the annual increases that would have gone to the poorer provinces and giving them to the rich ones (ie under the current formula not every province is getting 6% more in health transfers - some are getting a lot less, some (Alberta, Ontario) are getting a lot more).

[Bob Smith]

Jim,

Fair enough, equal per-capita transfers aren't as redistributive as the status quo, given the same amount of spending. But they are still redistributive.

"And I don't see how it's sensible to move a bunch of undereducated, under-skilled welfare or EI recipients to Alberta. They'll be as marginal there as here, and at least here they know their way around and have friends and family."

You don't remember the days when people couldn't get dishwashers at $20 an hour in Alberta.

[Jim Sentance]

If dishwashers are getting $20 an hour, what is it costing them to live there? May be a reason they couldn't get them.

[Neil]

$20/hour for a dishwasher was always an exageration. My employer at the time was hiring chainmen (unskilled labour that carry heavy things for a surveyor) for $15, and the food industry paid a couple dollars less. With overtime, though, that $15/hour could easily pay over $50k/year, plus a more than adequate meal allowance.

To a large extent the problem during the boom wasn't that there weren't enough warm bodies. It was that everyone thought of their job as disposible. Hung over? Don't worry about showing up for work. Having a bad day? Feel free to take it out on the customer. Nobody could get fired because it was cheaper to put up with a bad employee than find a new one. And getting laid off was practically a bonus, since a new job was easy to locate.

[Determinant]

There was an older man at a church I was at who described life in the immediate post-war period in Ontario in just those terms. If he wanted to take a three-day weekend to go fishing with his friends he would quit his job at the local Big Manufacturer. On Tuesday he'd return and get his job back. They were always wanting to hire.

I was amazed even then, and I was only in high school, that he would treat his job so casually.